Private sector propping up growth in construction expected to be short lived – industry confidence levels the lowest ever!

Private sector propping up growth in construction expected to be short lived – industry confidence levels the lowest ever!

Johannesburg, 10 October 2018 The results of Consulting Engineers South Africa’s (CESA) Bi-annual Economic and Capacity Survey for the period January to June 2018 recently released indicates positive news, that the construction sector has seen growth for the first time in six quarters. Confidence levels in the consulting sector deteriorated for the current quarter, reaching a record low – the least confident consulting engineers have ever been, based on the results of the surveys over the years since the mid-90’s.

Chris Campbell, CESA CEO states, “We can only assume that the growth in the construction sector was driven almost predominantly by the private sector, with an improvement in both private building plans passed and completed in the second quarter, according to Stats SA, with the civil engineering industry in disarray/survival mode. On the civil engineering side there has been a backlog of connecting projects to the grid. New energy minister Jeff Radebe has vowed to move this process along, which explains the uptick.”

The latest survey shows that people are worried about the outlook for the economy. Although the lowest figure ever reported, respondents are confident about the future, with confidence levels improving to 47.1 and 45.6 for the following two 6-month periods of July to December 2018, and January to June 2019 respectively.

Campbell states, “We have to start adapting to a low growth environment as the outlook for infrastructure spending is being hampered by poor economic growth, lower than expected revenue by government, international economic instability and price volatility, and low private sector confidence.”

Confidence in the consulting engineering sector lags business sentiment. Overall business confidence deteriorated to a level of 39 in the 2nd quarter of 2018, down from 45, associated with Ramaphoria excitement. Business confidence averaged below the 50 level over the past 7 years, due to uncertain outlook on interest rates and inflation, slowing economic growth and now further constrained by political instability, policy uncertainty and credit rating downgrades. 

Campbell says, “Market sentiment amongst the private sector is important to the engineering industry, since the private sector contributes on average, nearly 40 percent to total earnings. It is important for confidence levels to be restored to a level of between 60 and 70 to stimulate investment. Although the figures have improved since last year the current investment levels are poor.

Economic indicators suggest that investment in relation to GDP will be slow over the medium term, due to low government spending, financial constraints experienced by SOE’s and weak private sector confidence. GFCF as a percentage of GDP averaged at 9.5 percent in 2017 overall, and was 9.4 percent in the 2nd quarter. The NDP has, what may seem to be a somewhat unachievable target of 30 percent contribution of GFCF to GDP by 2030, which now looks like a rather optimistic goal.

Industry Challenges

Many consulting engineering firms commented that they are in survival mode. Regulation issues, including the procurement of consulting engineering services, remains one of the biggest challenges faced by the industry. Unrealistic tendering fees remains a concern for members, while the extended time to finalise a proposal is affecting profitability in the industry. CESA has offered their services to government to procure and implement projects. 

Fraud and corruption continues to be an issue in the industry. CESA is aware that members are under pressure from contractors and corrupt officials, to certify payment for work not completed. This is regarded as an extremely serious matter CESA will be relentless in holding those in power accountable.

Unlocking greater private sector participation is seen as a critical element to fast track delivery which will benefit the industry. Government must create an environment for the private sector so that it can contribute to infrastructure delivery. Many projects highlighted in the NDP can be carried out by the private sector through public-private partnerships. Service delivery, especially at municipal level remains a critical issue. The consulting engineering industry is threatened by incapacitated local and provincial governments. Lack of attention to maintain infrastructure poses a serious problem for the industry.

The involvement of non-CESA members in government tenders and procurement continues to threaten the standard and performance of the industry added to which firms from across South African borders are tendering at rates that are not competitive for local firms. 

Fee earnings in the first six months of 2018 decreased by 10.0 percent (in current prices) compared to the last six months of 2017, which is quite a massive drop in such a short space of time, and followed a 2 percent increase in the last six months of 2017. Earnings are expected to marginally increase in the second half of 2018. Considering trends in the indicators, as reported by respondents in this survey it is likely that earnings have probably passed the upper turning point with a softer growth outlook in the medium term.

The number of firms looking for engineers decreased to 20.0 percent from 51.7 percent in the previous survey, with a notable decrease in demand for technicians to 3.0 percent, from 73.4 percent reported two surveys ago. Demand for other technical staff increased in this survey to 18.0 percent, from 3.7 percent in this previous survey.